Dr. Simi Mehta
November 17, 2019

 

Marathon discussions at the highest governmental levels over the past few months involving Prime Minister (PM) Narendra Modi himself culminated in India’s decision against joining the Regional Comprehensive Economic Partnership (RCEP). Invoking Gandhi’s talisman, interests of all Indians, and his own conscience, PM Modi declined India’s membership to the ‘grand deal’. He mentioned that the pact provisions did not satisfactorily address India’s outstanding issues and concerns.

Formally launched at the ASEAN Summit in Cambodia in 2012, the RCEP negotiations is a mega free-trade agreement between the ten ASEAN countries and its six free-trade agreement (FTA) partners: India, China, Japan, South Korea, Australia, and New Zealand. Now India has opted out of the agreement. It is aimed at increasing economic integration by facilitating trade in goods, services, investments, economic and technical cooperation, competition, and intellectual property rights. The aim is to be a powerful vehicle to support the spread of global production networks and reduce the inefficiencies of multiple Asian trade agreements that exist presently. Once effective, RCEP would be the world’s largest economic bloc. As of 2018, the combined population of the member states was: 3.5 billion, and the total GDP (PPP) was: US$ 27.48 trillion. 

In the run-up to the conclusions of the RCEP in November 2019, the trade ministers of RCEP countries had met in Bangkok in the first week of September. The joint statement mentioned the desire and agreement among the members to resolve the outstanding and contentious issues, and that the opportunities to deepen the value chain within RCEP countries must not be lost. The core of the negotiating agenda was to cover trade in goods and services, investments, economic and technical cooperation, as well as dispute settlement. 

Major Reasons for India’s Refusal to Join RCEP

India’s decision to stay away from RCEP was a calculated decision that sought to incorporate the concerns of its domestic constituencies. Some of the push factors for this decision are discussed below:

  1. India has been wary of its trade deficit, given that its trade deficits have always widened with nations after signing free-trade-agreements (FTAs) with them. A Note on Free Trade Agreements and their Costs by NITI Aayog had analyzed multiple FTAs that India had signed over the past decade. It demonstrated that India’s imports from FTA countries had increased while its export to these destinations did not match up. It also evidenced that FTA utilization by India has been abysmally low between 5 and 25 percent.
    Source: Drawn by the author, Adapted from the Department of Commerce, Ministry of Commerce and Industry, Government of India, 2019

    India’s trade deficit with the FTA countries, most of them are RCEP nations- ASEAN, Malaysia, South Korea, Japan and Singapore, has almost doubled in the last five-six years – from $54 billion in 2013-14 to $105 billion in 2018-19. At present, India’s exports constitute 20 percent to the RCEP countries, vis-à-vis 35 percent of all imports from them. China is the largest exporter to almost all countries of the group, including India. India has a trade deficit with Australia, China, Indonesia, Laos, Myanmar, and the Philippines. Increasing trade deficit would deplete the foreign exchange reserve of India, which is not good for any economy. The following figure shows India’s trade scenario with RCEP countries during the 2018-19. 

  2. RCEP would have the provision to call on the member countries to lower the tariffs and import duties for each other. However, India believes that RCEP would further embolden China to dump its goods in Indian markets, further raise the trade deficits, and the anti-dumping duties that it has imposed on Chinese items from the chemicals and iron and steel sectors would lose their value. Scholars have argued that mistrust aggravated by China’s perceived “market imperialistic” predatory behavior had deepened India’s apprehensions about RCEP. RCEP, if fructified in its current state, would have led to three-quarters of Chinese goods entering India duty-free, thereby raising India’s trade deficit with China to more than the current level of US $63 billion. Various analysts in India are of the view that the country’s imports from China are undermining the growth of the domestic manufacturing sector. Also, scholars have underscored that India suspects that China unfairly subsidizes its exports to India to capture the market. 
  3. While there had been no discussions on the requisite tariff cuts from China, India has often sought greater market access in the Chinese market for its goods and services like pharmaceuticals, information technology, and agricultural products; but with limited successes.
  4. Some scholars have also mentioned that India’s dilemma is due to the fears of competitiveness and the contemporary state of the Indian economy. This is because once the deal comes into effect, India would need to eliminate the tariffs on 25 percent of its traded goods, and about 35 percent in a phased manner. This fear of competitiveness is evident from the Indian industry’s wariness on the possibility of duty cuts from India due to RCEP, especially in the dairy, metals, electronics, chemicals, and textiles sectors. Further, the prevailing slowdown in the economy, though not explicitly accepted by the government, has been cited as one of the reasons for India’s refusal to join the RCEP. It is important to point here that the International Monetary Fund in its latest World Economic Outlook, cut its India’s growth estimates for 2019 to 6.1 percent from 7 percent projected in July 2019, and recommended monetary policy and broad-based structural reforms to address cyclical weakness and strengthen confidence. Moody’s Investors Service cut India’s Gross Domestic Product (GDP) growth forecast for 2019-20 to 5.8 percent from the earlier estimate of 6.2 percent. Economic Survey 2019-20 projected growth rate of the economy was 7.2 percent during 2018-19, which is slightly higher than the previous fiscal year 6.8 percent. India needs to sustain a real GDP growth rate of 8 percent to achieve the objective of becoming a USD 5 trillion economy by 2024-25.
  5. India has always sought to capitalize on its labor force and seeks the freer movement of IT and other skilled professionals and workers among RCEP members. However, India is uncomfortable with the fact that that while the comparative advantage of manufacturing of countries like China, Vietnam, and Thailand and that of dairy and agriculture of Australia and New Zealand have been considered in the negotiations, India’s comparative advantage in services owing to its pool of ‘skilled’ labour force to gain from improved access to employment opportunities in these economies, has not been reciprocated. 
  6. There were fears that India’s agricultural sector, which is already in distress, would be crippled if RCEP had materialized. This is because India’s farmers would be faced with competitive dairy and agricultural produce from the member countries, which would drive them out of any income. Therefore, there is no surprise that Rashtriya Swamsevak Sangh’s affiliate Swadeshi Jagran Manch (SJM) and dairy industry led by Amul, India’s largest dairy producer praised India’s decision. Yogendra Yadav – a crusader of farmers’ rights, welcomed the government’s step, saying it was “much needed, and bold decision taken in the “larger national interest”.

Reactions of other RCEP member countries on India’s decision

Initially, questions were being raised on whether RCEP would come to fruition at all if India does not join. But as it appears, RCEP will take shape sans India, even though a few countries have expressed their willingness to work with India to resolve the latter’s concerns, so that eventually India could join RCEP. 

After India’s decision to withdraw from RCEP, the joint statement of all member countries mentioned that all participating countries would work to solve outstanding problems in a mutually satisfactory way. The Chinese foreign ministry has officially mentioned that China is willing to continue to negotiate and resolve the problems facing the negotiations with India in the spirit of mutual understanding and mutual accommodation and that India was welcome to join RCEP whenever it is ready. Japanese Trade Minister Hiroshi Kajiyama said that Tokyo would work toward a deal, including India. This would keep the world’s largest democracy within the RCEP framework and be in line with Prime Minister Shinzo Abe’s policy of bolstering ties with India to balance Beijing’s growing power. Indonesian Foreign Minister Retno Marsudi said that RCEP members would work together to solve India’s problems in a mutually satisfying way. 

Perhaps intercepting India’s decision much earlier, in September 2019, the Foreign Minister of Singapore Vivian Balakrishnan remarked that RCEP was poised to be the game-changer, with the potential to secure the prosperity of the members against the anti-trade and anti-globalization winds in the world. He had highlighted the objective of this pact to expand the middle class and inculcate the next generations with a sense of optimism, and that the RCEP members had the responsibility to ensure this through this deal. As a major proponent of this trade deal and a major foreign investor in India and China, Singapore urged the two countries to resolve the issues in their trade relationship. 

Had India joined the RCEP, then…

While it seems far-fetched, if India’s concerns and demands are acknowledged and incorporated by the RCEP members and help it to balance its trade inequality, then India could join the mega trade deal. In such a scenario, India would see a manifold increase in its middle class (which at present is the largest), as it moves towards becoming a US$ 5 trillion economy. India would be the harbinger of the ‘prosperous’ life of its citizens and move towards attaining the Sustainable Development Goal 1 of ending poverty in all its manifestations. India would see its geostrategic objective unfold through the RCEP, which would stand against the prevailing global trends of protectionism and unilateral policies.

Further, India could utilize the RCEP platform to raise the economic malpractices pursued by China in its own and in other countries with which it has huge trade relations. Steady discussions and negotiations on the same could lead to changes in Chinese foreign economic policies.

Implications for India post-RCEP exit

The importance of the RCEP cannot be underrated. It stems from being the single cornerstone of global trade bloc creation due to two factors: (i) withdrawal of the US from the Trans-Pacific Partnership (TPP) agreement, thereby rendering it ineffective; and (ii) the counterbalancing nature of the RCEP as the first trade bloc that groups large economies of the developing world in Asia-Pacific. At present, the dreams of upward socio-economic mobility of the Indians, which could have been made possible by joining RCEP, remains at a status-quo.  

India’s image for the support to multilateralism could be affected, as it might appear that India’s decision against joining RCEP was solely guided by the China factor; and that it could allocate some importance of a multilateral platform consisting of other important countries like Japan, South Korea, Australia, and the ASEAN member-states. India has healthy bilateral relations with each of these countries. Although the joint statement reads that the member countries would work towards resolving India’s concerns, the questions of ‘when’ and ‘how’ remain. This could eventually lead to an understanding-deficit between India and other RCEP members. This was lucidly stated by the Indonesian Minister of Trade Enggartiasto Lukita, that RCEP negotiations had reached the “point of no return” as increasingly hostile trade tensions could lead to a loss in the momentum that could drive changes and progress in the world economy.

In a globalized world, no economy can sustain itself by keeping itself closed or restricting economic forces when it can reap the fruits it offers. Rather than keeping itself out form RCEP, India needs to focus on strengths and areas where it has leverages. While major arguments against joining RCEP have been that it would destroy local industries, particularly agriculture, dairy, and fisheries and would worsen the trade deficit; those who would be hurt are the industrial blocs that seek protection from competition. For the consumers, on the other hand, this could have proved to be beneficial, through freer trade, cheaper goods, and more reliable prices, and also could have pushed domestic producers to produce quality goods at competitive rates. India has been concerned about the dumping of cheap Chinese goods in the country, but the fact remains that India would also gain access to a huge market of a population of around 2.5 billion. Hence, improving infrastructure for primary goods and imparting skills and competencies to the manufacturing sector should be India’s priority. It must improve the lives of the poorest. 

On the brighter side, the RCEP would have offered India with the opportunity to do more labor-intensive manufacturing as multinationals would be attracted to set up a manufacturing base in India, and RCEP membership will enable them to access the large RCEP market. Movement of inputs without tariffs and frictions across borders of 16 countries would make any multinational company established in India doubly competitive. While contending that it would have enormous strategic and foreign policy implications, India underscores the fact that its merits cannot be separated from its economic imperatives. In line with the objectives of India’s Act East Policy, the stability, security, prosperity of the nations and the population could see the light of the day, with strong powers like India having a strong authority over the future of the region, based on its values of democracy, respect for the rule-of-law of maritime, land, air spaces, and commitment to a peaceful regional and world order.

Conclusions

If operationalized, RCEP could be ‘the deal’ for the Indo-Pacific. As a multi-lateral and a pan-regional model, its center of gravity will be in the Indo-Pacific, thereby creating enormous opportunities for the member states to promote trade and economic integration under fair trade rules. 

Instead of worrying about the pitfalls of joining the RCEP, New Delhi should use this regional trading bloc to further domestic reforms and remove structural bottlenecks hurting its exports so that it can leave a bigger footprint on the world market. India should not risk getting isolated in the region, and must deliberate on getting its concerns addressed to balance its economic and strategic calculations and prepare itself to spearhead the “Indo-Pacific century”.

*** The Author is the CEO and Editorial Director of a New Delhi based think tank- Impact and Policy Research Institute (IMPRI). She holds a Ph.D. in American Studies from the School of International Studies, Jawaharlal Nehru University and was a Fulbright Scholar at Ohio State University, USA. She can be reached at simi@impriindia.org ***

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